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Blue Apron Holdings: Not A Bottom-Fishing Candidate

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About: Blue Apron Holdings, Inc. (APRN)
by: Taylor Dart
Taylor Dart
Long/short equity, momentum, gold & precious metals
Summary

Blue Apron Holdings has started off 2020 with a double-digit decline, following a horrendous 57% decline last year.

While the company has highlighted average revenue per customer growth as a highlight, this has not come close to offsetting a massive drop in total customers.

Both revenue and margins continue to contract as of the Q3 report, and there is still no clear path to profitability here.

Based on this weakness across the board, I do not see the stock as a bottom-fishing candidate, regardless how far the stock is off of its highs.

In a quarter where Hello Fresh has managed to put up massive growth in the home meal-kit industry, Blue Apron (APRN) continues to hemorrhage customers, with quarterly revenue growth rates following; down 34% year-over-year. Blue Apron is one of the worst-performing IPOs since its 2017 debut, and this isn't surprising at all, given how poorly they continue to perform across all segments of their business. The fact that Hello Fresh has been able to put up strong double-digit growth suggests that this is not an industry issue, but an execution issue for Blue Apron.

Given relatively high debt to equity, no clear path to profitability, and no signs of a turnaround, I see Blue Apron Holdings as an Avoid, even as it's 90% off of its highs. There are some companies worth bottom-fishing for, but this is not one of them.

(Source: Blue Apron Holdings, MarketWatch.com)

Blue Apron reported its Q3 results in October, and the results were spun as a win for investors with average revenue per customer [ARPU] growing 11% year-over-year, and average orders per customer up nearly 10% on a year-over-year basis. While these are undoubtedly impressive metrics, the company glossed over the fact that their total customer count was down more than 40% in the same period, with a net loss of 63,000 customers as well on a sequential basis (386,000 down from 449,000). This is massive erosion in the customer base, and a 40% drop in total customer count is hardly able to offset 10% growth in ARPU.

(Source: Blue Apron Holdings Earnings Call Slides Q3 2019)

If we look at average order value, we also saw some minor growth, with average order value up from $56.79 to $57.60 year-over-year. However, this pales in comparison to the massive plunge in orders from 2.65~ million orders in the Q3 2018 quarter to 1.73~ million orders in the Q3 2019 quarter. In order to offset this enormous drop in total orders, average order value would have had to grow nearly 50% to fill in this gap. Therefore, there's no reason to take solace in the above metrics highlighted by the company when the most critical metrics are busy falling off a cliff.

(Source: Blue Apron Holdings Press Release)

TTo make matters worse for Blue Apron investors, this is an execution issue and not an industry-wide issue. In the same period that Blue Apron lost 260,000 customers, Hello Fresh's active customer count grew by 470,000 in the US alone, proving that they have found a way to grow at break-neck speed and from a higher base, while Blue Apron is hemorrhaging customers. In terms of revenue growth, Hello Fresh managed to put up 44.9% revenue growth on a constant currency basis, compared to a 34% decline in revenue in the same period for Blue Apron. Therefore, this is not a home-meal kit industry going stale issue; this is a Blue Apron issue. Let's take a look and see how it's affected the company's growth metrics below:

(Source: Hello Fresh Earnings Call Slides Q3 2019)

As we can see in the below chart of annual earnings per share [EPS], Blue Apron continues to see sharp net losses, with estimates for a net loss per share of $4.22 in FY-2019. Unfortunately, this trend is not expected to improve much, with forecasts of net losses per share of $3.92 and $3.65 in FY-2020 and FY-2021, respectively. This is a huge issue as this does not put Blue Apron in a position to battle competition. At the same time that Blue Apron is battening down its hatches and trying to cut costs in both marketing and G&A, Hello Fresh's near profitability has provided it the opportunity to push for further market share. This has put Blue Apron in between a rock and a hard place as its high debt levels have forced it to rein its spending at a time when it needs its most. Given this fact, there is no clear path to profitability for FY-2020 for Blue Apron as it attempts to fend off competition, neither is there a path to profitability in sight either.

(Source: YCharts.com, Author's Chart)

If we move over to quarterly revenue growth rates, Q3 2019 revenues came in at $99.5 million, representing a 34% decline year-over-year. This was tied for the worst year-over-year growth rate in the past two years, with Q2 2019 also coming in at (-) 34%. We can see in the chart below that quarterly revenue growth rates are likely to begin to trend higher heading into FY-2020, and this would generally be a positive sign. However, it's important to note that this improvement from 25% year-over-year declines to high-teen declines expected by mid-2020 has only been achievable due to incredibly easy comps on a prior-year-period.

(Source: YCharts.com, Author's Chart)

Q1 2020 and Q2 2020 revenue estimates are currently sitting at $107.5 million and $106.6 million, respectively, and this would translate to a 24% and 11% decline in year-over-year revenues. While this may appear to be an improvement, these two quarters are lapping revenue declines of 28% and 34% in the prior-year period. Therefore, this is nothing to be impressed with here. A company that sees revenue drop 34% on a year-over-year basis and then only sees revenue slide 24% in the following period is not a sign of a turnaround; it's a sign of continued hemorrhaging through at a lesser pace. Based on this, I believe these sequential improvements into FY-2020 should be discounted.

Based on the fact that Blue Apron continues to see net losses combined with abysmal revenue growth rates, there is absolutely nothing to like here even from a value investors' standpoint. The first sign of a real turnaround would come in the form of two consecutive quarters of double-digit growth in revenue, not two consecutive quarters of less bad sequential declines in revenues like we expect to see in FY-2020. Until we see two consecutive quarters of double-digit revenue growth, I do not believe investors should even consider going bottom-fishing here.

If we move over to the financial situation, we have yet another issue. Based on the company's market cap of $70 million and net debt of over $68~ million, there is very little wiggle room for the company. While Blue Apron does have cash and cash equivalents of over $80 million, this is overshadowed by its significant debt load. The biggest issue here is that net debt continues to grow during the same period when revenues and gross margins continue to contract. If Blue Apron was unable to swing to a profit in a period where revenues were twice as high, and it had less competition, it's hard to make a case for how the company reaches profitability with weaker margins, lower revenue, and stiffer competition. Therefore, the company cannot afford to take on new debt to increase spending and battle peers in an attempt to gain back market share.

(Source: Koyfin.com)

Blue Apron has outlined a plan in its most recent call highlighting new customer expansion, menu choice flexibility, and efficient marketing alongside new partnerships to drive growth in the back half of 2020. While anything is possible, I do not see this as likely in the slightest. It is difficult enough to return to growth when the competition is on a level playing field, but much more difficult when a competitor like Hello Fresh has gained the upper hand, and new names like Freshly are joining the space. Therefore, I believe that investors on the sidelines would be wise to wait for this to prove itself out, rather than diving in and hoping for a turnaround to materialize based on these key initiatives.

Buying low and selling high is a strategy made famous by the value investors of the past century, and there are obvious cases where this tenet rings true. Unfortunately, companies that have fallen 90% off of their highs are often the most dangerous to go bottom-fishing for, as these are typically the cases where there is a severe issue that cannot be fixed over the course of a few quarters. This is especially true in a rising market environment, where the rising tide should be busy lifting all boats. As the below chart of the S&P-500 and Blue Apron Holdings shows, no tide, no matter how strong, has managed to buoy Blue Apron, as it's plunged quarter after quarter with minimal selling reprieve. Given the most recent Q3 results, there's no reason to expect this selling to abate, and I see the stock as one of the worst bottom-fishing candidates. Some investors may be looking for value in a market that's beginning to get expensive, but Blue Apron is not one of them. Let's dig into why below:

(Source: TC2000.com)

There are few prospects worse for an investment thesis than stocks making 52-week lows, and this is especially true when a market is busy making new highs. Unfortunately, this is the position that Blue Apron is in, and I don't see any reason this won't continue through 2020, and the fundamentals leave little to be desired. While sharp bounces of 30% to 50% are possible to remove oversold conditions, I would view any oversold rallies as opportunities for investors to exit Blue Apron. In summary, I see no reason to go bottom-fishing for Blue Apron stock, and I would view rallies back to the $7.00 level as selling opportunities.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.